Dollar extends early losses after downbeat ISM data

LisaTwaronite

SAN FRANCISCO (MarketWatch) -- The dollar extended losses against most major rivals Wednesday, plunging against the yen after the Institute of Supply Management said the U.S. factory sector contracted in December, crude-oil futures hit $100 a barrel for the first time and minutes from the Federal Reserve's last meeting showed little opposition to an interest rate cut.

Nearly all members of the Federal Open Market Committee backed the quarter percentage-point cut in the federal funds rate to 4.25% at the Dec. 11 meeting, though the minutes provided little guidance about what the FOMC might do at the Jan. 29 and 30 meeting. Read The Fed.

Lower interest rates weigh on the dollar because they reduce the return on dollar-denominated assets.

The minutes "suggested that the Fed remains concerned about the economic outlook, with members agreeing that the housing correction could be deeper and more prolonged than originally anticipated," said Matthew Strauss, senior currency strategist at RBC Capital Markets.

"The minutes leave the door wide open to further cuts, he said, adding that RBC expects the Fed funds rate to fall to 3.75% by the end of the first quarter.

Oil spike

Earlier Wednesday, crude for February delivery rallied $4.02 to $100 a barrel on the New York Mercantile Exchange, on expectations U.S. crude inventories may have fallen for a seventh straight week and concerns about violence in Nigeria, Africa's biggest crude producer. It closed shy of the $100 mark, but was still up almost $4 a barrel. See Futures Movers.

Oil's standard trading unit is dollars per barrel. As the dollar drops, so does the price of oil in non-dollar terms. This usually encourages investors who hold other currencies to bid up the price of oil, leading it to rise in dollar terms.

A report released in the morning session showed the ISM index fell to 47.7% from 50.8% in November. Economists expected the index to slide to 50.5%. Readings below 50% indicate more manufacturing firms were contracting than were growing in December. It was the lowest reading since April 2003 and the first sub-50 reading since January 2007. See Economic Report.

"The real question is whether today's data point to a brief pause in activity or a more persistent trend. It is always tough to make that call when faced with one outlier downside reading. We are inclined to wait a month and see what the January figures look like before tossing the manufacturing sector onto the trash heap," he added.

U.S. stocks ended sharply lower Wednesday, after the ISM report and crude-oil price spike. A brief respite after the Fed minutes proved unsustainable. See Market Snapshot.

Yen surges; pound slips

The stock market downturn lifted the yen, which tends to weaken as investor's appetite for risk increases and they take on so-called carry trade positions, in which investors borrow funds in yen at low rates to invest in other higher-yielding assets.

Commerce Department data showed spending on construction projects hit a two-month high in November, rising by 0.1% on strong outlays for public, state and local construction projects. Economists surveyed by MarketWatch had been expecting construction spending to fall by 0.5% in November.

Spending on home construction, meanwhile, continued its slide, falling by 2.5% in November following a drop of 2.3% in October. It's the 21st consecutive decline. See Economic Report.

Yuan starts on high note

In Asian trading Wednesday, the Chinese yuan kicked off the new year with a new record high close against the dollar over-the-counter trading. The yuan rose to 7.2934 against the dollar, up from Friday's 7.3041 close. Chinese markets were closed Monday.

The yuan gained nearly 7% in 2007, with more than 2% of the gains coming in the past two months of 2007.

In its tightly controlled currency markets, China permits the yuan to trade in a band of 0.5% on either side of its official parity rate, which it sets daily.

Chinese officials have indicated that the yuan will be allowed to gradually appreciate in the country's tightly controlled foreign-exchange market, to help alleviate domestic inflationary pressures.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.